Tuesday, September 23, 2008

Last Friday’s FDIC event – the takeover of Ameribank – has given me some thought.

It’s a small bank – it has 8 branches, 112 million in assets and 115 million in deposits.

NPLs were 5 percent June last year.They were 32 percent at year end and 45 percent by June 30 this year.

45% NPLs is what it took to get an FDIC event.

There is much speculation (see WSJ, Calculated Risk etc) that WaMu might be taken over by the FDIC.

Last I looked (ie last quarter) the WaMu NPL over total assets were 3.62 percent, up from 1.29 percent a year ago or 2.17 percent at year end.I am not comparing apples with apples.The NPLs WaMu quotes are against total assets, not total loans – but they are still only in the low 4s.

Now there is plenty of room for NPLs to rise.There are a lot of option ARMs in WaMu’s book –and NPLs have been rising quite consistently and in my view will continue to rise.

But if you take the FDIC on form its not likely to confiscate WaMu soon.It waited more than six months AFTER Ameribank reported 32% NPLs for a takeover.

In the blogosphere I am in a (small) minority of believing that WaMu will probably be OK in the end.I know its gonna get a lot worse.But the FDIC seems to take a lot to act – and I am not sure that that much happens at WaMu.

Then again WaMu might run out funds – and that would force the FDIC hand.So far there is little evidence of that but…

Tomorrow WaMu will increase the interest rate on its online savings account to 4.00% APY... Not a good sign to be paying up that kind of rate in this rate environment.

Liquidity and Capital are the drivers of an FDIC takeover. Not NPAs... Oviously NPAs are an indicator or coming capital problems... but if you have or can get the capital to absorb the losses, the FDIC will not act.

Also comparing such a small private bank to a large public one brings up some other issues. A private owner or group owners of this small bank may have pumped in more capital to buy time. Something that wouldn't and/or couldn't happen on WaMu's scale...

New York, September 22, 2008 — Moody’s Investors Service downgraded the financial strength rating of Washington Mutual Bank to E from D+. Additionally, Washington Mutual Inc. preferred stock was downgraded to Ca from B2. All ratings of Washington Mutual Bank (deposits and senior unsecured at Baa3, subordinate debt at Ba1, short term Prime-3) and Washington Mutual Inc. (senior unsecured at Ba2, subordinate at Ba3, preferred at Ca) were placed under review for downgrade.

There is more to a bank than just accounting. There is the trust and confidence of depositers. This is the reason there is so much talk of FDIC action. If people run from this bank it will shatter confidence everywhere.

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